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The Use of Life Insurance to Magnify Your Giving Plan

The Use of Life Insurance to Magnify Your Giving Plan

| August 01, 2023

The Use of Life Insurance to Magnify Your Giving Plan

The use of life insurance can be a powerful as well as creative tool in conjunction with your charitable giving. Traditionally life insurance is used to replace the income of bread winner in the event of their premature death. In the case of charitable giving, life insurance is often used as a replacement vehicle for gifts given to charities.

Although this article just touches the surface regarding the many planning opportunities available, hopefully it might shed some light on how life insurance could be an important part of your overall giving strategy.

An important assumption here is that giving is a high priority for you.

A dilemma for many is their desire to support a cause that they’re passionate about but at the same time they want to benefit their children and grandchildren. This is where life insurance can be a powerful tool. Not only that but it could be part of an overall planning technique that generates potential income and estate tax benefits, for you the donor.

A few examples follow:

For an existing policy, a charity could be named as a beneficiary or partial beneficiary or, a policy could be donated to a charity. Future premiums could be gifted to the charity and might be income tax deductible. In addition, the life insurance proceeds would no longer be included in your estate for estate tax purposes. Also, you could lower the death benefit to an amount for which no future premiums would be required.

A new life insurance policy could be purchased in which the charity is the owner and the benefactor.

For larger policies that pay dividends the dividend could be donated to your charity or the gift could be amplified by having the dividends purchase a new policy for which the charity is the owner and beneficiary.

One of the more popular ways to utilize life insurance in a giving plan is through wealth replacement. In this manner, life insurances make it possible for a for a donor to make an immediate or deferred gift of land, stock, or other property while still providing for a family inheritance. There are ways this can be achieved while at the same time receiving multiple layers of tax benefits. It is even possible to use the tax benefit to pay for or help pay for the insurance premiums.

Qualified and non-qualified retirement plans are one of the best assets to give because they are exceptionally tax inefficient in passing wealth to heirs. The retirement plans could be directly given to the charity and life insurance used to replace the wealth. Life insurance would be received income tax free by your beneficiaries.

In the case of spouses, a second-to-die life insurance policy could be applied for as the premium would be less than a single-life insured. Of course, the proceeds would not be paid until both spouses have passed.

Life insurance is a self-completing gift. Even if the donor passes after making only a few premium payments, the charity is assured a full gift. In these situations, the death proceeds can be received by the designated charity, free of federal income and estate taxes, probate, and administrative trade costs, and without any delays, fees or transfer costs.

These are just a few examples of how life insurance can help leverage your giving plan. In subsequent articles, we can demonstrate how life insurance can be combined with other planning tools and techniques. Contact us if you would life to discuss a possible giving plan with or without the use of life insurance.